Real Time Communications Featured Article

Cable's Looming Millennial Event Horizon

September 26, 2014

It’s become almost boring to say that the cable and pay-TV space is undergoing a massive shift in consumer consumption as over-the-top (OTT) services like Netflix and Amazon Prime move firmly into the mainstream. But what’s interesting is that while there’s little evidence that these are actually supplanting traditional cable subscriptions in any significant volume to date, pay-TV as a whole is making concessions to the trend, and adapting to meet evolving consumer needs, resulting in a nascent era of hybrid and blended TV services that give the consumer much more control over what they watch than they ever have had before.

And, while such efforts are in their infancy, it’s clear that this will become crucial as millennials move into the market. Younger consumers are much less likely to value a cable subscription than their older counterparts, so while the picture remains good for now, changes will have to continue in order for traditional operators to hang onto success in the long-term.

Cord-Cutting and Cord-Shaving: Little Effect So Far

Despite charging an average of $100 or more per month for basic entertainment, cable and other pay-TV segments have an advantage when it comes to consumer loyalty: access to premium channels like HBO, and exclusive access to things like major league sports. Especially in the latter’s case, the programming rights are so expensive that no OTT provider could hope to monetize them on the back of a $7.99 per month subscription—leaving it squarely in the purview of traditional TV.

Also, cable provides other benefits, namely convenience. The set-top box (STB) acts as “input one”—and is an aggregation point for disparate content sources. Watching OTT on the other hand requires disconnecting the STB and plugging in some other box in order to get content on the big-screen TV, often at the mercy of whatever broadband connection is in place in the home. And, considering that no one OTT service has all of the content that a single pay-TV subscription does, it’s likely that the consumer would be toggling between apps and paying for multiple OTT subscriptions just to somewhat approximate what cable gives them all in one place, within one programming guide.

So, despite rising subscription costs and the growth of online video services, pay-TV in the U.S. has actually shown subscriber gains and reduced seasonal losses. According to the latest informitv Multiscreen Index, the total number of subscribers across the top 10 pay-TV services was up by over 400,000 year-on-year as of August 2014 and by more than 1.5 million over two years. Pointedly, it showed that the companies lost 165,500 digital television customers in the seasonally weak second quarter of 2014, representing 0.2 percent of their combined subscriber base of more than 87 million homes. This compares with 274,700 in the same quarter in 2013 and 207,700 in 2012.

Not all segments are created equal however and, notably, cable continues to struggle: Comcast, Time Warner Cable, Charter and Mediacom all lost video subscribers. But not against OTT. Rather, DirecTV, DISH Network, AT&T and Verizon all made gains in video customers over the year: DIRECTV and DISH Network added 249,000 TV subs, a significant improvement on 60,000 for the previous year, while AT&T U-verse and Verizon FiOS gained 1.23 million video customers over the year, compared to a 1.41 million increase the previous year. By contrast Comcast and Time Warner Cable, which are planning to merge their operations, lost 296,000 subscribers in the second quarter and 910,000 over the year.

"Changes in subscriber numbers should be viewed in the context of seasonality, relative scale, and overall market size," said index editor William Cooper. "In an increasingly competitive mature market, the longer-term trend is that satellite and telco providers have been gaining customers, generally at the expense of cable companies."

The informitv Multiscreen Index also found that APRU has been increasing across the board.

But, despite cable losses, the firm noted that customers appear to be adopting lower cost online video subscription services such as Netflix in addition to pay TV, rather than as a substitute. Cooper said that he believes that so far, pay-TV providers’ response to the threat and opportunity of online delivery (i.e., TV Everywhere and range of multiscreen services) has been a successful strategy.

Real-Time Communications and Interactivity: In Demand by Millennials

The picture changes, if you will, when it comes to the younger demographics, and evidence shows that the happy times could come to an end for pay-TV and sooner rather than later. Simply put, the bread-and-butter of cable subscriptions are the Generation X-and-older crew; those under 30 are less likely or not likely at all to be attached to them.

Consider: research by media analyst Michael Nathanson of Moffett Nathanson Research has found that the median age of a broadcast or cable television viewer during the 2013-2014 TV season was 44.4 years old, a 6 percent increase in age from four years earlier. And, TV viewers are aging faster than the U.S. population, which has a median age of 37.2, according to the U.S. Census. That’s a figure that increased 1.9 percent over a decade, meaning that TV audiences aged 5 percent faster than the average American.

Result? A finely honed age divide that pay-TV will simply have to address.

It gets even more black-and-white: According to nScreenMedia, 19 percent of millennials are living without pay-TV; out of those, 98 percent say they have no intention of getting it.

So how can there be common ground between millennials and traditional TV? nScreen analyst Colin Dixon said that it will boil down to social TV and second-screen efforts.

"A big part of the problem is that these young viewers have grown up in the interactive world of the Internet and mobile phones," said Dixon. "The passive television experience is simply not interesting to them. For the generation reared with a smartphone in almost constant contact with their friends, media consumption is rarely an entirely solo experience. Their opinions are as much a part of the experience as the media they are consuming."

Bringing the voice of the audience to the traditional TV experience is the best way to guarantee the long-term future of the medium, he said. That means taking approaches like that of HuffPost Live (HPL), which uses a mix of editorialized “shows” and social comments to attract an average of 22 million monthly unique viewers watching for, on average, 18 minutes each.

Also, Twitter recently said that 70 percent of millennials say they enjoy reading tweets while tracking a live event on TV, 71 percent say that tweeting about any event makes it more fun, and most of those would follow a hashtag related to the event.

"Finding a way to more directly connect social interaction with the TV screen and the shows themselves is key to keeping TV competitive for the long haul," Dixon said. "That means making social interaction a part of the pay TV platform and, ultimately, another brush in the color palette of the content creators."

Offering TV in new ways is another strategy; Comcast has launched Xfinity On Campus, a service that lets college students watch live TV and on-demand content on their IP-enabled devices, including, laptops, tablets and smartphones while on campus. The hope of course is to snag new Xfinity customers before they’re even out of school and paying rent (and signing up for TV service).

Hybrid TV Advances

Cable and its brethren also need to find a way to make OTT work for it, in order to offer viewers more control over their choices—and increasingly, there are movements in this direction.

“As consumers gain increased access to OTT content through their TVs they are more apt to watch reduced amounts of pay-TV, avoid video-on-demand services offered by MSOs or cancel their pay-TV subscriptions outright,” said Brandon Ferro, a hedge fund analyst at Only Prices Matter. “Such has been the case in recent years as the pay-TV industry has experienced no growth or declines in pay-TV subscriptions. To prevent this dynamic from persisting MSOs are highly incentivized to integrate OTT services into their own offerings.”

So far, such moves are off to a slow launch; but some cable operators are first-movers. Earlier this year, three U.S. cable MSOs, RCN, Atlantic Broadband and Grande Communications, became the first to offer Netflix on their operator-managed, TiVo-powered set-top boxes. The move echoes TiVo/Netflix launches at Virgin Media in the U.K. and Com Hem in Sweden.

With hybrid technologies getting more mainstream, fragmentation has been looming as an issue for operators and developers, so work is being done on the back end too. For instance, to help bring harmonization to the space, the members of the Open IPTV Forum and the HbbTV Association have merged their activities into a single organization, with a mission to create standards for supporting the convergence of over-the-top, hybrid broadcast/broadband and IPTV.

Similarly, the Reference Design Kit (RDK) community has been gaining steam, with CPE vendors like SmartLabs and ARRIS licensing it to further advance hybrid and IP interactive TV solution strategies. The RDK is a pre-integrated software bundle that provides a common framework for powering CPE from TV service providers, including set-top boxes, gateways and converged devices. So, TV service providers can standardize certain elements of these devices, and also easily customize the applications and user experiences that ride on top.

The RDK is supported by more than 160 licensees including CE manufacturers, chip vendors, software developers, system integrators and TV service providers. It is administered by the RDK Management LLC, a joint venture between Comcast Cable, Time Warner Cable and Liberty Global.

Edited by Stefania Viscusi

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